1 income statement

2
C H A P T E RC H A P T E R 44
INCOME STATEMENT AND RELATEDINCOME STATEMENT AND RELATED
INFORMATIONINFORMATION
Intermediate Accounting
IFRS Edition
Kieso, Weygandt, and Warfield

3
1.1. Understand the uses and limitations of an income statement.Understand the uses and limitations of an income statement.
2.2. Understand the content and format of the income statement.Understand the content and format of the income statement.
3.3. Prepare an income statement.Prepare an income statement.
4.4. Explain how to report items in the income statement.Explain how to report items in the income statement.
5.5. Identify where to report earnings per share information.Identify where to report earnings per share information.
6.6. Understand the reporting of accounting changes and errors.Understand the reporting of accounting changes and errors.
7.7. Prepare a retained earnings statement.Prepare a retained earnings statement.
8.8. Explain how to report other comprehensive income.Explain how to report other comprehensive income.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

4
ElementsElements
MinimumMinimum
disclosuredisclosure
IntermediateIntermediate
componentscomponents
IllustrationIllustration
CondensedCondensed
income statementsincome statements
Income StatementIncome Statement
Format of IncomeFormat of Income
StatementStatement
Reporting WithinReporting Within
the Incomethe Income
StatementStatement
Other ReportingOther Reporting
IssuesIssues
UsefulnessUsefulness
LimitationsLimitations
Quality ofQuality of
EarningsEarnings
Gross profitGross profit
Income fromIncome from
operationsoperations
Income beforeIncome before
income taxincome tax
Net incomeNet income
Non-controllingNon-controlling
interestsinterests
Earnings per shareEarnings per share
DiscontinuedDiscontinued
operationsoperations
Intraperiod taxIntraperiod tax
allocationallocation
SummarySummary
AccountingAccounting
changes and errorschanges and errors
Retained earningsRetained earnings
statementstatement
ComprehensiveComprehensive
incomeincome
Changes in equityChanges in equity
statementstatement
Income Statement and Related InformationIncome Statement and Related InformationIncome Statement and Related InformationIncome Statement and Related Information

5
Evaluate past performance.Evaluate past performance.
Income StatementIncome StatementIncome StatementIncome Statement
LO 1 Understand the uses and limitations of an income statement.LO 1 Understand the uses and limitations of an income statement.
Help assess the risk or uncertainty ofHelp assess the risk or uncertainty of
achieving future cash flows.achieving future cash flows.
Predicting future performance.Predicting future performance.
UsefulnessUsefulness

6
Companies omit items that cannotCompanies omit items that cannot
be measured reliably.be measured reliably.
Income StatementIncome StatementIncome StatementIncome Statement
LimitationsLimitations
Income measurement involvesIncome measurement involves
judgment.judgment.
Income is affected by the accountingIncome is affected by the accounting
methods employed.methods employed.

7
Format of the Income StatementFormat of the Income StatementFormat of the Income StatementFormat of the Income Statement
IncomeIncome – Increases in economic benefits during the accounting– Increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets orperiod in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, otherdecreases of liabilities that result in increases in equity, other
than those relating to contributions from shareholders.than those relating to contributions from shareholders.
Elements of the Income StatementElements of the Income Statement

8
LO 2 Understand the content and format of the income statement.
Revenue AccountsRevenue Accounts
SalesSales
Fee revenueFee revenue
Interest revenueInterest revenue
Dividend revenueDividend revenue
Rent revenueRent revenue
IncomeIncome includes both revenues and gains.includes both revenues and gains.
RevenuesRevenues - ordinary activities of a company- ordinary activities of a company
GainsGains - may or may not arise from ordinary activities.- may or may not arise from ordinary activities.
Gain AccountsGain Accounts
Gains on the sale of long-termGains on the sale of long-term
assetsassets
Unrealized gains on available-Unrealized gains on available-
for-sale securities.for-sale securities.

9
LO 1 Understand the uses and limitations of an income statement.
ExpensesExpenses – Decreases in economic benefits during the– Decreases in economic benefits during the
accounting period in the form of outflows or depletions of assetsaccounting period in the form of outflows or depletions of assets
or incurrences of liabilities that result in decreases in equity,or incurrences of liabilities that result in decreases in equity,
other than those relating to distributions to shareholders.other than those relating to distributions to shareholders.
Cost of goods soldCost of goods sold
Depreciation expenseDepreciation expense
Interest expenseInterest expense
Examples of Expense AccountsExamples of Expense Accounts
Elements of the Income Statement
Rent expenseRent expense
Salary expenseSalary expense

10
LO 2 Understand the content and format of the income statement.LO 2 Understand the content and format of the income statement.
Expense AccountsExpense Accounts
Cost of goods soldCost of goods sold
Depreciation expenseDepreciation expense
Interest expenseInterest expense
Rent expenseRent expense
Salary expenseSalary expense
ExpensesExpenses includes both expenses and losses.includes both expenses and losses.
ExpensesExpenses - ordinary activities of a company- ordinary activities of a company
LossesLosses - may or may not arise from ordinary activities.- may or may not arise from ordinary activities.
Loss AccountsLoss Accounts
Losses on restructuring chargesLosses on restructuring charges
Losses on to sale of long-termLosses on to sale of long-term
assetsassets
Unrealized losses on available-Unrealized losses on available-
for-sale securities.for-sale securities.

11
IFRS requires,IFRS requires, at a minimumat a minimum, the following be presented on, the following be presented on
the income statement.the income statement.
LO 2 Understand the content and format of the income statement.LO 2 Understand the content and format of the income statement.

12
IntermediateIntermediate
ComponentsComponents
Common forCommon for
companies tocompanies to
present some or allpresent some or all
of these sectionsof these sections
and totals within theand totals within the
income statement.income statement.
Illustration 4-1
Income Statement Format
LO 2LO 2

13
IllustrationIllustration
FormatFormatFormatFormat
LO 3LO 3
Illustration 4-2
Income Statement
Includes all of theIncludes all of the
major items in the listmajor items in the list
above, except forabove, except for
discontinueddiscontinued
operations.operations.

14
LO 3 Prepare an income statement.LO 3 Prepare an income statement.
CondensedCondensed
MoreMore
representativerepresentative
of the typeof the type
found infound in
practice.practice.
Illustration 4-3
Condensed Income Statement

15
Reporting Within the Income StatementReporting Within the Income StatementReporting Within the Income StatementReporting Within the Income Statement
Gross ProfitGross Profit
LO 4 Explain how to report items in the income statement.LO 4 Explain how to report items in the income statement.
Computed by deducting cost of goods sold from net salesComputed by deducting cost of goods sold from net sales
revenue.revenue.
Disclosure of net sales revenue is useful.Disclosure of net sales revenue is useful.
Unusual or incidental revenue is disclosed in other incomeUnusual or incidental revenue is disclosed in other income
and expense.and expense.
Analysts can more easily understand and assess trends inAnalysts can more easily understand and assess trends in
revenue from continuing operations.revenue from continuing operations.

16
Income from OperationsIncome from Operations
Determined by deducting selling and administrativeDetermined by deducting selling and administrative
expenses as well as other income and expense from grossexpenses as well as other income and expense from gross
profit.profit.
Highlights items that affect regular business activities.Highlights items that affect regular business activities.
Used to predict the amount, timing, and uncertainty ofUsed to predict the amount, timing, and uncertainty of
future cash flows.future cash flows.

17
Income from OperationsIncome from Operations
Reported byReported by
 Nature, orNature, or
 FunctionFunction
Expense ClassificationExpense Classification

18
Illustration:Illustration: Assume that the accounting firm of Telaris Co.Assume that the accounting firm of Telaris Co.
provides audit, tax, and consulting services. It has theprovides audit, tax, and consulting services. It has the
following revenues and expenses.following revenues and expenses.
Expense ClassificationExpense Classification

19
Expense Classification (Expense Classification (NatureNature-of-Expense-of-Expense Approach)Approach)
Illustration 4-5Illustration 4-5

20
Expense Classification (Expense Classification (FunctionFunction-of-Expense-of-Expense Approach)Approach)
The function-of-expense method is generally used in practice although manyThe function-of-expense method is generally used in practice although many
companies believe both approaches have merit.companies believe both approaches have merit.

21
Number of Unusual ItemsNumber of Unusual Items
Reported in a Recent YearReported in a Recent Year
by 600 Large Companiesby 600 Large Companies
Gains and LossesGains and Losses

22
IASBIASB takes the position that bothtakes the position that both
revenues and expenses andrevenues and expenses and
other income and expenseother income and expense
should be reported as part of income from operations.should be reported as part of income from operations.
Companies can provide additional line items, headings, and subtotals whenCompanies can provide additional line items, headings, and subtotals when
such presentation is relevant to an understanding of the entity’s financialsuch presentation is relevant to an understanding of the entity’s financial
performance.performance.

23
Additional items that may need disclosure:Additional items that may need disclosure:
 Losses on write-downs of inventories to net realizable value or ofLosses on write-downs of inventories to net realizable value or of
property, plant, and equipment to recoverable amount, as well asproperty, plant, and equipment to recoverable amount, as well as
reversals of such write-downs.reversals of such write-downs.
 Losses on restructurings of the activities and reversals of anyLosses on restructurings of the activities and reversals of any
provisions for the costs of restructuring.provisions for the costs of restructuring.
 Gains or losses on the disposal of items of property, plant, and,Gains or losses on the disposal of items of property, plant, and,
equipment or investments.equipment or investments.
 Litigation settlements.Litigation settlements.
 Other reversals of liabilities.Other reversals of liabilities.

24
Income before Income TaxIncome before Income Tax
Financing costs must be reported on the income statement.Financing costs must be reported on the income statement.
Illustration 4-8

25
Net IncomeNet Income
Represents the income afterRepresents the income after allall
 revenues andrevenues and
 expensesexpenses
for the period are considered.for the period are considered.
Viewed by many as the most important measure of aViewed by many as the most important measure of a
company’s success or failure for a given period of time.company’s success or failure for a given period of time.

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Allocation to Non-Controlling InterestAllocation to Non-Controlling Interest
If a company prepares a consolidated income statement thatIf a company prepares a consolidated income statement that
includes a partially own subsidiary. IFRS requires that net incomeincludes a partially own subsidiary. IFRS requires that net income
of the subsidiary be allocated to the controlling and non-of the subsidiary be allocated to the controlling and non-
controlling interest. This allocation is reported at the bottom of thecontrolling interest. This allocation is reported at the bottom of the
income statement after net income.income statement after net income.
Illustration 4-9
(amounts given)

27
€€800,000800,000
100,000100,000
120,000120,000
90,00090,000
BE4-3:BE4-3: Presented below is some financial information related toPresented below is some financial information related to
Volaire Group. Compute the following:Volaire Group. Compute the following:
RevenuesRevenues €€800,000800,000
Income from continuing operationsIncome from continuing operations 100,000100,000
Comprehensive incomeComprehensive income 120,000120,000
Net incomeNet income 90,00090,000
Income from operationsIncome from operations 220,000220,000
Selling and administrative expensesSelling and administrative expenses 500,000500,000
Income before income taxIncome before income tax 200,000200,000
Other IncomeOther Income
and Expenseand Expense
€€80,00080,000
Solution on
notes page

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€€800,000800,000
100,000100,000
120,000120,000
90,00090,000
€€20,00020,000
FinancingFinancing
CostsCosts
Solution on
notes page

29
€€100,000100,000
€€800,000800,000
- 100,000- 100,000
120,000120,000
90,00090,000
Income TaxIncome Tax
Solution on
notes page

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-- €€10,00010,000
€€800,000800,000
100,000100,000
120,000120,000
- 90,000- 90,000
DiscontinuedDiscontinued
OperationsOperations
Solution on
notes page

31
€€30,00030,000
€€800,000800,000
100,000100,000
120,000120,000
- 90,000- 90,000
OtherOther
IncomeIncome
Solution on
notes page

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Important business indicator.Important business indicator.
Measures the dollars earned by each ordinary share.Measures the dollars earned by each ordinary share.
Must be disclosed on the income statement.Must be disclosed on the income statement.
LO 5 Identify where to report earnings per share information.LO 5 Identify where to report earnings per share information.
Net income - Preference dividendsNet income - Preference dividends
Weighted average of ordinary shares outstandingWeighted average of ordinary shares outstanding
Earnings Per ShareEarnings Per Share

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Earnings Per Share (BE4-10):Earnings Per Share (BE4-10): In 2010, Hollis CorporationIn 2010, Hollis Corporation
reported net income of $1,000,000. It declared and paidreported net income of $1,000,000. It declared and paid
preference share dividends of $250,000. During 2010, Hollis hadpreference share dividends of $250,000. During 2010, Hollis had
a weighted average of 190,000 ordinary shares outstanding.a weighted average of 190,000 ordinary shares outstanding.
Compute Hollis’s 2010 earnings per share.Compute Hollis’s 2010 earnings per share.
- $250,000- $250,000$1,000,000$1,000,000
190,000190,000
= $3.95$3.95 per shareper share
Net income - Preference dividendsNet income - Preference dividends
Weighted average number of ordinary sharesWeighted average number of ordinary shares

34 LO 5 Identify where to report earnings per share information.LO 5 Identify where to report earnings per share information.
Discontinued OperationsDiscontinued Operations
A component of an entity that either has been disposed of, or isA component of an entity that either has been disposed of, or is
classified as held-for-sale, and:classified as held-for-sale, and:
1.1. Represents a major line of business or geographical area ofRepresents a major line of business or geographical area of
operations, oroperations, or
2.2. Is part of a single, co-coordinated plan to dispose of a majorIs part of a single, co-coordinated plan to dispose of a major
line of business or geographical area of operations, orline of business or geographical area of operations, or
3.3. Is a subsidiary acquired exclusively with a view to resell.Is a subsidiary acquired exclusively with a view to resell.

35 LO 5 Identify where to report earnings per share information.LO 5 Identify where to report earnings per share information.
Discontinued OperationsDiscontinued Operations
Companies report as discontinued operationsCompanies report as discontinued operations
1.1. (in a separate income statement category) the gain or loss(in a separate income statement category) the gain or loss
from disposal of a component of a business.from disposal of a component of a business.
2.2. The results of operations of a component that has been orThe results of operations of a component that has been or
will be disposed of separately from continuing operations.will be disposed of separately from continuing operations.
3.3. The effects of discontinued operations net of tax, as aThe effects of discontinued operations net of tax, as a
separate category after continuing operations.separate category after continuing operations.

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Total loss on discontinued operations 800,000
Illustration: Multiplex Products, a highly diversified company,
decides to discontinue its electronics division. During the current
year, the electronics division lost $300,000 (net of tax). Multiplex
sold the division at the end of the year at a loss of $500,000 (net
of tax).
Income from continuing operations $20,000,000
Discontinued operations:
Loss from operations, net of tax 300,000
Loss on disposal, net of tax 500,000
Net income $19,200,000
LO 5 Identify where to report earnings per share information.

37
A company thatA company that
reports areports a
discontinueddiscontinued
operation mustoperation must
report per sharereport per share
amounts for theamounts for the
line item either online item either on
the face of thethe face of the
income statementincome statement
or in the notes toor in the notes to
the financialthe financial
statements.statements.

38
SummarySummary
LO 6 Explain intraperiod tax allocation.LO 6 Explain intraperiod tax allocation.

39
SummarySummary

40
Different Income ConceptsDifferent Income Concepts
Users andUsers and
preparers look atpreparers look at
more than justmore than just
the bottom linethe bottom line
income number,income number,
which supportswhich supports
the IFRSthe IFRS
requirement torequirement to
provide subtotalsprovide subtotals
within the incomewithin the income
statement.statement.

41
Company adopts a different accounting principle.Company adopts a different accounting principle.
Retrospective adjustment.Retrospective adjustment.
Cumulative effect adjustment to beginning retained earnings.Cumulative effect adjustment to beginning retained earnings.
Approach preserves comparability.Approach preserves comparability.
Examples include:Examples include:
 Change from FIFO to average cost.Change from FIFO to average cost.
 Change from the percentage-of-completion to theChange from the percentage-of-completion to the
completed-contract method.completed-contract method.
Other Reporting IssuesOther Reporting IssuesOther Reporting IssuesOther Reporting Issues
LO 7 Understand the reporting of accounting changes and errors.LO 7 Understand the reporting of accounting changes and errors.
Accounting Changes and ErrorsAccounting Changes and Errors
Changes in Accounting PrincipleChanges in Accounting Principle

42
Change in Accounting Principle:Change in Accounting Principle: Gaubert Inc. decided inGaubert Inc. decided in
March 2011 to change from FIFO to weighted-average inventoryMarch 2011 to change from FIFO to weighted-average inventory
pricing. Gaubert’s income before taxes, using the new weighted-pricing. Gaubert’s income before taxes, using the new weighted-
average method in 2011, is $30,000.average method in 2011, is $30,000.
Calculation of a Change inCalculation of a Change in
Accounting PrincipleAccounting Principle
Income StatementIncome Statement
Presentation of a ChangePresentation of a Change
in Accounting Principlein Accounting Principle
(Based on 30% tax rate)(Based on 30% tax rate)
Pretax Income Data
Solution on
notes page

43
Accounted for in the period of change and future periods.Accounted for in the period of change and future periods.
Not handled retrospectively.Not handled retrospectively.
Not considered errors.Not considered errors.
Examples include:Examples include:
 Useful lives and residual values of depreciable assets.Useful lives and residual values of depreciable assets.
 Allowance for uncollectible receivables.Allowance for uncollectible receivables.
 Inventory obsolescence.Inventory obsolescence.
Changes in EstimateChanges in Estimate

44
Change in Estimate:Change in Estimate: Arcadia HS, purchased equipment forArcadia HS, purchased equipment for
$510,000 which was estimated to have a useful life of 10 years$510,000 which was estimated to have a useful life of 10 years
with a salvage value of $10,000 at the end of that time.with a salvage value of $10,000 at the end of that time.
Depreciation has been recorded for 7 years on a straight-lineDepreciation has been recorded for 7 years on a straight-line
basis. In 2011 (year 8), it is determined that the total estimatedbasis. In 2011 (year 8), it is determined that the total estimated
life should be 15 years with a salvage value of $5,000 at the endlife should be 15 years with a salvage value of $5,000 at the end
of that time.of that time.
Questions:Questions:
 What is the journal entry to correctWhat is the journal entry to correct
the prior years’ depreciation?the prior years’ depreciation?
 Calculate the depreciation expenseCalculate the depreciation expense
for 2011.for 2011.
No EntryNo Entry
RequiredRequired

45
EquipmentEquipment $510,000$510,000
Fixed Assets:Fixed Assets:
Accumulated depreciationAccumulated depreciation 350,000350,000
Net book value (NBV)Net book value (NBV) $160,000$160,000
Balance SheetBalance Sheet (Dec. 31, 2010)(Dec. 31, 2010)
After 7 yearsAfter 7 years
Equipment cost $510,000
Residual value - 10,000
Depreciable base 500,000
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years =x 7 years = $350,000$350,000
First, establish NBVFirst, establish NBV
at date of change inat date of change in
estimate.estimate.
First, establish NBVFirst, establish NBV
at date of change inat date of change in
estimate.estimate.

46
After 7 yearsAfter 7 years
Net book value $160,000
Residual value (new) - 5,000
Depreciable base 155,000
Useful life remaining 8 years
Annual depreciation $ 19,375
DepreciationDepreciation
Expense calculationExpense calculation
for 2011.for 2011.
DepreciationDepreciation
Expense calculationExpense calculation
for 2011.for 2011.
Depreciation expense 19,375
Accumulated depreciation 19,375
Journal entry for 2011

47
Result from:Result from:
 mathematical mistakes.mathematical mistakes.
 mistakes in application of accounting principles.mistakes in application of accounting principles.
 oversight or misuse of facts.oversight or misuse of facts.
Corrections treated asCorrections treated as prior period adjustments.prior period adjustments.
Adjustment to the beginning balance of retainedAdjustment to the beginning balance of retained
earnings.earnings.
Corrections of ErrorsCorrections of Errors

48
Corrections of Errors:Corrections of Errors: To illustrate, in 2012, Hillsboro Co.To illustrate, in 2012, Hillsboro Co.
determined that it incorrectly overstated its accountsdetermined that it incorrectly overstated its accounts
receivable and sales revenue by $100,000 in 2011. In 2012,receivable and sales revenue by $100,000 in 2011. In 2012,
Hillsboro makes the following entry to correct for this errorHillsboro makes the following entry to correct for this error
(ignore income taxes).(ignore income taxes).
Retained earningsRetained earnings 100,000100,000
Accounts receivableAccounts receivable 100,000100,000

49

50 LO 8 Prepare a retained earnings statement.LO 8 Prepare a retained earnings statement.
IncreaseIncrease
Net incomeNet income
Change inChange in
accounting principleaccounting principle
Prior periodPrior period
adjustmentadjustment
DecreaseDecrease
Net lossNet loss
DividendsDividends
Change inChange in
accounting principleaccounting principle
Prior periodPrior period
adjustmentadjustment
Retained Earnings StatementRetained Earnings Statement

51 LO 8 Prepare a retained earnings statement.LO 8 Prepare a retained earnings statement.
Retained Earnings StatementRetained Earnings Statement

52
DisclosedDisclosed
In notes to the financial statements.In notes to the financial statements.
As Appropriated Retained Earnings.As Appropriated Retained Earnings.
LO 8 Prepare a retained earnings statement.LO 8 Prepare a retained earnings statement.
Restrictions of Retained EarningsRestrictions of Retained Earnings

53
All changes in equity during a period except thoseAll changes in equity during a period except those
resulting from investments by owners and distributionsresulting from investments by owners and distributions
to owners.to owners.
IncludesIncludes::
 all revenues and gains, expenses and lossesall revenues and gains, expenses and losses
reported in net income, andreported in net income, and
 all gains and losses that bypass net income but affectall gains and losses that bypass net income but affect
equity.equity.
Comprehensive IncomeComprehensive Income
LO 9 Explain how to report other comprehensive income.LO 9 Explain how to report other comprehensive income.

54
Other ComprehensiveOther Comprehensive
IncomeIncome
Unrealized gains andUnrealized gains and
losses on available-for-losses on available-for-
sale securities.sale securities.
Translation gains andTranslation gains and
losses on foreignlosses on foreign
currency.currency.
Plus othersPlus others
+
Reported in EquityReported in Equity
Comprehensive IncomeComprehensive Income
Income Statement

55
Review QuestionReview Question
Gains and losses that bypass net income but affect equityGains and losses that bypass net income but affect equity
are referred to asare referred to as
a.a. comprehensive income.comprehensive income.
b.b. other comprehensive incomeother comprehensive income..
c.c. prior period incomeprior period income..
d.d. unusual gains and lossesunusual gains and losses..
Gains and losses that bypass net income but affect equityGains and losses that bypass net income but affect equity
are referred to asare referred to as
a.a. comprehensive income.comprehensive income.
b.b. other comprehensive incomeother comprehensive income..
c.c. prior period incomeprior period income..
d.d. unusual gains and lossesunusual gains and losses..

56
Two approaches to reporting ComprehensiveTwo approaches to reporting Comprehensive
Income:Income:
1.1. A second income statement.A second income statement.
2.2. A combined statement of comprehensiveA combined statement of comprehensive
income.income.

57
IncomeIncome
Two-statementTwo-statement
format:format:
IncomeIncome

58
IncomeIncome
CombinedCombined
statementstatement
format:format:
IncomeIncome

59
Statement of Changes in EquityStatement of Changes in Equity
Required,Required, in additionin addition to a statement of comprehensiveto a statement of comprehensive
income.income.
 Generally comprised ofGenerally comprised of
 share capital—ordinary,share capital—ordinary,
 share premium—ordinary,share premium—ordinary,
 retained earnings, and theretained earnings, and the
 accumulated balances in other comprehensiveaccumulated balances in other comprehensive
items.items.

60
Reports the change in each equity account and in totalReports the change in each equity account and in total
equity for the period.equity for the period.
1.1. Comprehensive income for the period.Comprehensive income for the period.
2.2. Contributions (issuances of shares) and distributionsContributions (issuances of shares) and distributions
(dividends) to owners.(dividends) to owners.
3.3. Reconciliation of the carrying amount of each componentReconciliation of the carrying amount of each component
of equity from the beginning to the end of the period.of equity from the beginning to the end of the period.

61

62
Regardless of the display format used, V. Gill reports theRegardless of the display format used, V. Gill reports the accumulatedaccumulated
other comprehensive incomeother comprehensive income of $90,000 in the equity section of theof $90,000 in the equity section of the
statement of financial position as follows.statement of financial position as follows.

63
 Presentation of the income statement under U.S. GAAP follows either aPresentation of the income statement under U.S. GAAP follows either a
single-step or multiple-step format. IFRS does not mention a single-stepsingle-step or multiple-step format. IFRS does not mention a single-step
or multiple-step approach. In addition, under U.S. GAAP, companiesor multiple-step approach. In addition, under U.S. GAAP, companies
must report an item as extraordinary if it is unusual in nature andmust report an item as extraordinary if it is unusual in nature and
infrequent in occurrence. Extraordinary items are prohibited underinfrequent in occurrence. Extraordinary items are prohibited under
IFRS.IFRS.
 Under IFRS, companies must classify expenses by either nature orUnder IFRS, companies must classify expenses by either nature or
function. U.S. GAAP does not have that requirement, but the U.S. SECfunction. U.S. GAAP does not have that requirement, but the U.S. SEC
requires a functional presentation.requires a functional presentation.

64
 IFRS identifies certain minimum items that should be presented on theIFRS identifies certain minimum items that should be presented on the
income statement. U.S. GAAP has no minimum informationincome statement. U.S. GAAP has no minimum information
requirements. However, the SEC rules have more rigorous presentationrequirements. However, the SEC rules have more rigorous presentation
requirements.requirements.
 IFRS does not define key measures like income from operations. SECIFRS does not define key measures like income from operations. SEC
regulations define many key measures and provide requirements andregulations define many key measures and provide requirements and
limitations on companies reporting non-U.S. GAAP/IFRS information.limitations on companies reporting non-U.S. GAAP/IFRS information.
 U.S. GAAP does not require companies to indicate the amount of netU.S. GAAP does not require companies to indicate the amount of net
income attributable to non-controlling interest.income attributable to non-controlling interest.
 U.S. GAAP and IFRS follow the same presentation guidelines forU.S. GAAP and IFRS follow the same presentation guidelines for
discontinued operations, but IFRS defines a discontinued operationdiscontinued operations, but IFRS defines a discontinued operation
more narrowly. Both standard-setters have indicated a willingness tomore narrowly. Both standard-setters have indicated a willingness to
develop a similar definition to be used in the joint project on financialdevelop a similar definition to be used in the joint project on financial
statement presentation.statement presentation.

65
 Both U.S. GAAP and IFRS have items that are recognized in equity asBoth U.S. GAAP and IFRS have items that are recognized in equity as
part of comprehensive income but do not affect net income. U.S. GAAPpart of comprehensive income but do not affect net income. U.S. GAAP
provides three possible formats for presenting this information: singleprovides three possible formats for presenting this information: single
income statement, combined income statement of comprehensiveincome statement, combined income statement of comprehensive
income, in the statement of shareholders’ equity. Most companies thatincome, in the statement of shareholders’ equity. Most companies that
follow U.S. GAAP present this information in the statement offollow U.S. GAAP present this information in the statement of
shareholders’ equity. IFRS allows a separate statement ofshareholders’ equity. IFRS allows a separate statement of
comprehensive income or a combined statement.comprehensive income or a combined statement.
 Under IFRS, revaluation of property, plant, and equipment, andUnder IFRS, revaluation of property, plant, and equipment, and
intangible assets is permitted and is reported as other comprehensiveintangible assets is permitted and is reported as other comprehensive
income. The effect of this difference is that application of IFRS results inincome. The effect of this difference is that application of IFRS results in
more transactions affecting equity but not net income.more transactions affecting equity but not net income.

66
The terminology used in the IFRS literature is sometimes different thanThe terminology used in the IFRS literature is sometimes different than
what is used in U.S. GAAP.what is used in U.S. GAAP.

67
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted inReproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without theSection 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.express written permission of the copyright owner is unlawful.
Request for further information should be addressed to theRequest for further information should be addressed to the
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may make back-up copies for his/her own use only and not formay make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility fordistribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of theseerrors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.programs or from the use of the information contained herein.
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